System and method for making positions held by a trader fungible

ABSTRACT

Positions held by a trader are made fungible by selecting a first position in a first futures contract that is deliverable and selecting a second position in a second futures contract, wherein the first and second futures contracts are traded in a first and second market, respectively. Offsetting the first and the second positions eliminates a delivery obligation of the trader.

CROSS REFERENCE TO RELATED APPLICATIONS

Not applicable

REFERENCE REGARDING FEDERALLY SPONSORED RESEARCH OR DEVELOPMENT

Not applicable

SEQUENTIAL LISTING

Not applicable

BACKGROUND OF THE INVENTION

1. Field of the Invention

The present invention relates generally to trade clearing systems andmore particularly to a system and method that enables traders to makepositions held thereby fungible.

2. Description of the Background of the Invention

Exchanges enable buyers and sellers to trade financial instruments suchas stocks, bonds, options, cash, agricultural products and commodities,and futures, etc. A futures contract is a financial instrument thatrepresents an obligation for delivery or acceptance of another,underlying, financial instrument at a specified time in the future. Thefinancial instrument that underlies a futures contract may include aquantity of grains, metals, oils, bonds, or cash. The exchangeestablishes a futures contract specification that defines the underlyingproduct, a quantity of the underlying product represented by one futurescontract, and an expiration date (when the delivery is to begin). Thespecification defines the expiration date for a futures contract interms of a month and a year and the futures contract expires on apredetermined day of the defined month and year.

A futures contract may be traded in a physical exchange where buyers andsellers meet. A buyer and a seller use an open outcry auction processamong other buyers and sellers to negotiate a price at which to buy andsell, respectively, a quantity of the futures contract. After the buyerand seller agree upon the quantity and the price, the buyer and theseller each report his/her portion of the trade to the exchange. Theinformation reported by the buyer comprises identification informationabout the buyer, who the buyer believes is the seller, the quantity thebuyer believes has been purchased, and the price to be paid thereby.Similarly, the seller reports information comprising identificationinformation thereof, who the seller believes is the buyer, and thequantity the seller believes has been sold and the price to be receivedthereby. In some cases, the exchange encodes and transmits to aclearinghouse the information reported by the buyer and the sellerseparately as two sets of trade data. Alternately, the exchange createsand transmits to the clearinghouse matched trade data that comprises theinformation reported by both the buyer and the seller.

A futures contract may also be traded in an electronic exchange, whereina trader submits an order to a trading host. The order is either a bidor an offer that indicates a desire to purchase or sell, respectively,the futures contract. The order identifies, at least, the futurescontract, the quantity of the futures contract the trader wishes to buyor sell, the price at which the trader wishes to buy or sell the futurescontract, and a direction of the order (i.e., whether the order is a bidor an offer). The trading host monitors orders that are received therebyto identify a bid (an offer) for a financial instrument at a particularprice with an offer (a bid) for the same financial instrument at thesame or lower (higher) price. Upon identification of the bid and theoffer, a quantity associated therewith is matched and the quantity,price, and identification information regarding the buyer and seller aretransmitted to the clearinghouse as matched trade data.

The exchange has separate markets that are designated to trade certainfutures contracts. An open-outcry exchange typically has multipletrading pits with each trading pit, or even a portion thereof,designated for a particular market. Similarly, electronic exchanges havemultiple markets where each market trades certain financial instrumentsand orders associated with each market are managed separately. Forexample, a futures exchange may have separate markets to trade futurescontracts for delivery of 10-Year Treasure Notes in March, 2006, 2-YearNotes in June, 2008, Gold in February 2010, and Oats in March 2007, etc.Furthermore, futures contracts that have identical underlying productsbut that expire at different times are also traded in separate markets.For example, futures contracts for delivery of 10-Year Treasury Notes inMarch 2006, and for delivery of 10-Year Treasure Notes in June, 2006,are traded in two different markets

The trader who has sold a futures contract is said to have a “short”position and the trader who has purchased a futures contract is said tohave a “long” position. A position held by a trader can be offset(eliminated) by obtaining an opposite position in a subsequent trade.For example, a trader who has a short position for a quantity of afutures contract may offset the short position by purchasing an equalquantity of the futures contract. Similarly, a trader who has a longposition for a quantity of a futures contract may offset the longposition by selling an equal quantity of the futures contract. In thesecases, the trader who offsets the position for the quantity of thefinancial instrument eliminates any delivery or receipt obligationassociated with the position.

Futures contracts can offset one another only if they are traded in thesame market. Futures contracts that have different contractspecifications (e.g., deliverable vs. cash settled, lot sizes, etc.) andthus are traded in different markets cannot offset one another in themanner described above.

The clearinghouse receives trade data regarding trades conducted duringa trading session, matches trade data that is transmitted separately,and transmits matched (cleared) trade data to a clearing firm associatedwith each trader. Each clearing firm marks to market the account of eachtrader associated therewith. In addition, for each futures contracttraded by traders associated with the clearing firm, the clearing firmcalculates a sum of the open long positions and a sum of the open shortpositions in the futures contract held by traders associated with theclearing firm. The clearing firm thereafter reports the sum of the openpositions for the futures contract to the clearinghouse. Theclearinghouse records the open long and short position for the futurescontract reported by each clearing firm. In addition, the clearinghousecalculates the open interest for the futures contract that is the sum ofthe open long or short positions held all reporting clearing firm. Itshould be apparent that the sum of the open long positions held by allreporting clearing firms is identical to the sum of the open shortpositions held by all reporting clearing firms. The clearinghousereports the open interest for each futures contract to the exchange,which thereafter reports the open interest to traders and otherinterested parties.

The clearinghouse provides systems that a staff member of a clearingfirm, can use to obtain open positions held by the clearing firm. Forexample, The Chicago Mercantile Exchange Clearing Services provides asystem called Front End Clearing system (FEC) that the staff member ofthe clearing firm can use to obtain the status of trades made by thetrader.

Most traders trade futures contracts with the expectation of liquidatingtheir positions before the last trading day and thus eliminating anyobligation of having to provide or accept delivery. Such traders expectto offset their positions by trading with other traders such that atexpiry, the traders who hold the short and long positions in thecontract are those who have sufficient quantity of the underlyingproduct (e.g., Oats) to deliver and those who wish to receive theunderlying product, respectively.

Futures contracts that are deliverable call for delivery of a specificgrade of a commodity or instrument upon expiration, which is defined bythe contract specification of the futures contract. For example,consider a futures contract for delivery of Oats in December, 2006,wherein each contract represents 5,000 bushels of Oats. A trader whoholds 5 open short positions in this futures contract must deliver25,000 bushels of Oats after the last trading day of December, 2006,unless the short positions are liquidated (i.e., offset) before then.Similarly, a trader who, after the last trading day of December, 2006,holds 5 long positions in the same futures contract, must accept 25,000bushels of Oats if the 5 positions are not liquidated before then.Typically, the delivery or acceptance obligations associated with afutures contract must be fulfilled within a predetermined numberbusiness days after expiration of the futures contract and is specifiedby the specification of the futures contract defined by the exchange. Toprovide delivery, the trader who holds an open short position in afutures contract delivers warehouse receipts to the trader who holds anopen long position for the quantity of underlying product represented bythe short position. In some cases, the clearing firm associated with thetrader who holds the open short position delivers the warehouse receiptsto the clearing firm associated with the trader who holds the open longposition.

The trader who holds the short position, but does not have sufficientquantity of the underlying product, must satisfy the deficit by buying abalance of the underlying product on the open cash market. Similarly,the trader who holds the long position but does not have a need for thequantity of the underlying product may sell the excess on the openmarket, possibly at a loss. In addition, the trader who is long and notin need of the delivery may incur additional expenses related to storageand delivery.

Other futures contracts may be cash settled. These contracts typicallytrade in an identical fashion to deliverable products and informationregarding purchases and sales of such futures contracts are reported tothe clearinghouse and clearing firms identically. At the end of each thetrading session until expiry, the account of each trader who hold anopen short position or an open long position in the cash settled futurescontract is credited or debited, respectively, in accordance with thesettlement price of the futures contract.

An exchange may have multiple future contract specifications associatedwith the same underlying product and expiration date. For example, anexchange may have full size futures contract and a mini futurescontract, wherein the quantity of the underlying product associated witheach mini futures contract is less than the quantity of the underlyingproduct associated with each full size futures contract. For example,the Board of Trade of the City of Chicago defines specifications for afull size and a mini contract for silver, wherein both contracts expirein March, 2007. Each full size futures contract for silver is associatedwith a delivery of 5,000 ounces and each mini size contract for silverassociated with 1,000 ounces of silver. The exchange may allow a traderwho has accepted delivery of a full-size contract to convert a receiptfor the delivery for an appropriate quantity of receipts for delivery ofmini-sized contracts. For example, in the case of the Board of Trade ofthe City of Chicago a trader who has taken delivery of a receiptredeemable for a full-size (i.e., 5,000 ounce) lot of silver to exchangethe receipt for five receipts for mini-sized (i.e., 1,000 ounce) lots ofsilver. Each of the five receipts for mini-sized lots of silver obtainedby the trader in this manner may be used to deliver on a short positionheld thereby in mini-sized silver contracts.

At the expiry of a futures contract for a particular product, it ispossible that a trader who holds a short position in a first futurescontract also holds a long position in a second futures contract,wherein the two futures contracts are traded in different markets butthe underlying product and the quantity of the underlying productrepresented by each position are identical. For example, the trader mayhold 1 short position in December, 2006, Oats and 5 long positions inDecember, 2006, mini-Oats (each position represents 5,000 bushels ofOats) If the two futures contracts are cash settled, then at the expiryof the two futures contracts, the clearinghouse adjusts the accounts ofthe trader in accordance with the contracts. Some clearinghouses allowthe trader who holds a long position in one cash settled contract and ashort position in another cash-settled contract to request that the twopositions be made fungible before expiration of either contract, even ifthe two futures contracts are traded in different markets. In response,the clearinghouse liquidates the positions held by the trader andcredits the account of the trader accordingly.

If the clearinghouse is able to make two cash settled products fungible,and thus offset one another, then no deliveries of underlying productsare involved. However, making a long position in a first futurescontract and a short position in a second futures contract, where eitherthe first or the second futures contract is deliverable fungible in thisfashion would result in a situation, after settlement by theclearinghouse, where the sum of open short positions reported byclearing firms would not be identical to the sum of open long positionsreported by the clearing firms in the specific markets where the firstand second futures contracts are traded. At expiry, a trader would havean open position to either deliver or accept delivery of the underlyingproduct involved, yet no one to receive or deliver the product,respectively.

In another situation, it is possible that the trader holds a position ina deliverable contract and an opposite position in a cash settledfutures contract, wherein the quantity of the product underlying bothcontracts is identical. In this regard, the trader has no price risk forthe positions held thereby in that the deliverable contract and the cashsettled contract expire to the same settlement price. The cash settledproduct and deliverable products cannot be settled against one anotherdespite their quantity equivalency because the two types of contractstrade in separate markets and thus are not fungible. In this examplewhen the cash settled futures contract is liquidated on last trading dayby means of cash settlement, the position in the deliverable futurecontract represents a delivery obligation to the trader as describedabove. Because of this delivery obligation and the risks associated withit, the trader desires to liquidate his position in the cash settledfuture contract and the deliverable futures contract prior to the lasttrading day.

SUMMARY OF THE INVENTION

According to one aspect of the invention, positions held by a trader aremade fungible by selecting a first position in a first futures contractthat is deliverable and selecting a second position in a second futurescontract, wherein the first and second futures contracts are traded in afirst and second market, respectively. The first and the second positionare offset and a delivery obligation of the trader is therebyeliminated.

In another aspect of the invention, a method of making first long andfirst short positions held by a first trader fungible comprises the stepof identifying a first request from the first trader to make the firstlong position and the second short position fungible, wherein the firstlong position is for a deliverable futures contract. The methodcomprises the additional step of selecting a second request from asecond trader to make a second long position and a second short positionfungible, wherein the second short position is for the deliverablefutures contract. The first long position is offset against the secondshort position and the first short position is offset against the secondlong position, thereby eliminating the delivery obligations of the firstand second traders.

According to yet another aspect of the invention, a method liquidates adelivery obligation of a trader by identifying a first position acquiredin a first market, wherein the first position has a delivery obligationassociated therewith. In addition, the method identifies a secondposition acquired in a second market and offsets the first and thesecond position, thereby eliminated the delivery obligation.

Other aspects and advantages of the present invention will becomeapparent upon consideration of the following detailed description.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 shows a logical block diagram of a clearing process;

FIG. 2 shows a flow chart illustrating how the clearing system of FIG. 1makes positions fungible; and

FIG. 3 shows another flow chart illustrating how the clearing system ofFIG. 1 makes positions fungible.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS

FIG. 1 depicts a logical block diagram 100 of a clearing process. Anexchange 102 sends information about each trade executed therein to aclearing system 104 operated by the clearinghouse 106. The trade mayhave been undertaken in an open outcry auction or matched by a tradinghost as described above. The trade information may comprise dataregarding the purchase or the sale of a futures contract or may comprisematched trade data. Co-pending U.S. Patent Applications having Ser. Nos.11/236,995 and 11/237,015, which are incorporated herein by reference,describe generation of matched trade data by an exchange for reportingto a clearinghouse. An example of how trade data is reported to aclearinghouse is provided in co-pending U.S. patent application Ser. No.10/992,061, which is incorporated herein by reference.

The clearing system 104 validates the trade information and creates arecord for the trade information in a position database 108 thereof.After the trade has been reported but before expiration of either afirst futures contract or a second futures contract held by a firsttrader associated with a first clearing firm 110, the first clearingfirm 110 can submit a first request that the clearing system 104 attemptto make a short position in the first futures contract and a longposition in the second futures contract fungible, where the quantity ofthe product underlying the first futures contract is identical to thatof the second futures contract. In one embodiment, the staff member, atthe first clearing firm 110, submits the first request using trademanagement systems provided by the clearinghouse such as the FEC. Insome embodiments, the trade management system displays to the staffmember only those contracts that are held by traders associated with theclearing firm and that may be made fungible and the staff member selectsthe positions that comprise the first request. If the first and thesecond futures contracts are cash settled, the clearing system adjuststhe clearing account of the trader accordingly as described hereinabove.However, if either the first or the second futures contracts isdeliverable, then the clearing system 104 compares the first requestwith other requests previously submitted thereto by clearing firmsassociated with other traders to identify and select a second requestsubmitted by a second clearing firm 112 associated with a second trader,wherein the second request comprises a long position in the firstfutures contract and a short position in the second futures contract. Insome embodiments, the requests received by the clearing system arestored and processed either periodically or at a predetermined time ofday. To process such requests, the clearing system sorts the storedrequests in order of time in which each request was received, andselects the oldest request as a first request to be compared againstpending requests received earlier. It should be apparent that othermethods of sorting may used including by time a request was sent, byquantities associated with the requests, by identity of the requestingtrader or clearing firm, etc.

The products underlying the first futures contract and second futurescontract need not be identical. In addition, the first and secondcontracts may have different expiration dates. For example, a trader maywish to make a long position in a futures contract for Soybeans fungiblewith a short position in a futures contract for Soybean Oil. In anotherexample, the trader may wish to make a long position in a futurescontract for Soybeans fungible with a short position in a futurescontract for Corn. It should be apparent that the long and shortpositions comprising the first request may have been acquired in a firstand a second exchange respectively. The clearing system 102 offsets suchpositions against short and long positions of a second request that wereacquired in a second and first exchange, respectively.

In one embodiment, the trader may request that the clearing system 104make a first long position in a first futures contract and a second longposition in a second futures contract held thereby fungible. Inresponse, the clearing system 104 offsets the first long positionagainst a first short position in the first futures contract and offsetsthe second long position in the second futures contract against a secondshort position in the second futures contract, wherein the first andsecond short positions are held by another trader.

In some embodiments, if the clearing system 104 does not identify anappropriate second request, the clearing system 104 records informationregarding the first request in the position database 108. In otherembodiments, the request is recorded in another database associated withthe clearing system 104. In one embodiment, the positions data andrequest information are stored in a relational database such as Oracle10 g™, developed by Oracle Corporation.

If the clearing system 104 does identify a second request, the clearingsystem 104 settles a first quantity of the long position held by thefirst trader against an identical quantity of the short position held bythe second trader. Typically, the clearing system does not track theidentities, positions, or requests on an individual basis. Instead, theclearing system tracks positions and requests made by clearing firms whoare an intermediary between the trader and the clearinghouse and alsobetween two traders. In addition, the clearing system 104 settles asecond quantity of the short position of the first trader against thelong position of the second trader. Preferably, the first quantity isthe minimum of the number of long position contracts of the firstrequest and the number of short position contracts of the secondrequest. The clearing system 104 thereafter adjusts trade records in theposition database 104 corresponding to the long and short positions ofthe first clearing firm 110 and second clearing firm 112, respectively,in accordance with the first quantity. The clearing system 104 alsoadjusts the trade records and corresponding to the short and longpositions of the first clearing firm 110 and second clearing firm 112,respectively, in accordance with the second quantity. The clearingsystem notifies the first clearing firm 110 and the second clearing firm112 that the requests submitted thereby (or portions thereof) have beensatisfied, and the first clearing firm 110 and second clearing firm 112adjust the accounts of the first and second trader, respectively,accordingly.

In some embodiments, if the clearing system 104 identifies multiplepreviously submitted requests that have a long position in the firstfutures contract and a short position in the second futures contractthen the clearing system 104 selects the request that was receivedearliest. In other embodiments, the clearing system 104 allocates thequantities of the long and short positions of the first request in a prorata fashion amongst the previously received requests.

Because the long quantity of a deliverable futures contract traded in amarket is offset against an identical short quantity of the deliverablefutures contract in the market, the quantity of remaining open shortpositions remains identical to the number of remaining open longpositions held by traders in the market. Therefore, the remaining openquantities of all other traders may be settled in accordance withcontract specifications associated with the market.

Some embodiments of the clearing system 104 compare the open positionsof a trader associated with the first clearing firm 110 with requestsstored in the positions database 108 to identify one or morecombinations of the open positions held by the trader that may be madefungible. The staff member of the clearing firm 110 selects one of theidentified combinations and clearing system 104 makes the open positionscomprising the combination fungible in the manner described above.

In another embodiment, the clearing system 104 compares the openpositions of the trader associated with the clearing firm 110 withrequests stored in the position database 108 to identify individual openpositions held by the trader, any two of which can be made fungible.Although, the embodiments above describe communications being undertakenbetween a clearing firm and the clearing system, some embodiments mayallow individual traders to submit requests to make positions heldthereby fungible without having to go through a clearing firm as anintermediary. It should also be apparent, that the clearing firm maysubmit requests regarding positions held in house accounts thereof.

FIG. 2 illustrates a flowchart 200 of how the clearing system 104 makespositions held by the trader associated with the clearing firm 110fungible. A block 202 receives a request from the clearing firm 110indicating a long position in a first futures contract and a shortposition in a second futures contract that the trader wishes to makefungible. In some embodiments processing proceeds to a block 204 uponreceipt of the request. In other embodiments, the block 202 stores therequest for a period of time before proceeding to the block 204. Theblock 204 validates the request to insure that the information suppliedby the clearing firm 110 is correct. Some embodiments validate therequest without manual intervention, whereas other embodiments comprisea manual review of the request when validating the request. If the block204 determines that the request is valid then processing proceeds to ablock 206. Otherwise, the clearing firm is notified of errors in therequest and processing exits at a block 208. In one embodiment, theblock 208 performs cleanup operations (such as releasing allocatedmemory, closing database connections, etc.) and returns processing toother tasks within the clearing system 104, including a task that waitsfor additional requests from traders.

The block 206 queries the positions database 108 to identify anypreviously received requests stored therein that indicates a shortposition in the first futures contract and a long position in the secondfutures contract specified by request received by the block 202. If anypreviously received requests are identified processing proceeds to ablock 210; otherwise, a block 212 creates a new record in the positionsdatabase 108 and stores information regarding the received requesttherein and proceeds to the block 208 to exit.

The block 210 assigns a priority to the previously received requestsidentified by the block 206 in accordance with the allocation methodthat is to be used to allocate the quantities associated with the longand short positions of the received request among the short and longpositions, respectively, of the identified, previously receivedrequests. In some embodiments, the block 210 sorts the previouslyreceived requests in accordance with the time of receipt of each requestwhere a request received earlier is assigned a higher priority.

A block 214 selects an identified request that has the highest priority.A block 216 allocates, and thus offsets, a quantity of the long positionof the received request to an identical quantity of the short positionof the selected request. The block 216 also offsets a quantity of theshort position of the received request to an identical quantity of thelong position of the selected request. The quantity of the long (short)position of the selected request that is offset depends on theallocation method used. If a first-in/first-out allocation method isused, then the block 216 offsets a quantity of the long (short) positionof the received request with a sufficient amount of the short (long)position of the selected request. If a pro-rata method is used, then theblock 216 offsets a quantity of the long (short) position of thereceived request with a proportional amount of the quantity of the short(long) position of the selected request and all of the other identifiedrequests.

The quantity of the short and long positions of the selected request tobe offset, as calculated by the block 216, are subtracted from the shortand long positions of the selected request by a block 218. If quantitiesof the short and long positions of the selected request are not zero,then the block 218 updates a record of the position database 108 wherethe information regarding the selected request is stored to reflect thenew quantities. The block 218 also updates the records associated withthe account of the trader who submitted the selected request.

A block 220 subtracts from the quantities of the long and short positionof the request received at the block 202 the quantities thereof that areoffset (as calculated by the block 216). A block 222 determines if anyquantities of positions of the request remain and if none remain thenprocessing exits at the block 208. Otherwise, a block 224 determines ifthere is an additional previously received request identified at theblock 206 that has not been processed through the blocks 214-222, and ifthere is, processing proceeds to the block 214. If all of the identifiedrequests have been processed, then processing proceeds to the block 212,which creates a new record in the position database for the quantitiesof the long and short positions of the request that remain.

FIG. 3 depicts a flowchart 300 of an embodiment of how two requests fromtwo clearing firms may be made fungible. A block 302 receives a firstrequest from a clearing firm to make a first short position in a firstfutures contract and a first long position in a second futures contractheld thereby fungible. A block 304 receives a second request from eitherthe clearing firm or a second clearing firm to make fungible a secondshort position in the second futures contract and a second long positionfungible in the first futures contract. In some embodiments, the firstrequest may be stored in a database before the second request isreceived. A block 306 matches the first long position against the secondshort position and the first short position against the second longpositions as described above with reference to blocks 210-220 of FIG. 2.If any quantities of the positions associated with the first request orthe second request remain, the positions database is updated accordinglyby a block 308.

In some embodiments, the clearing firm submits a request to make twopositions fungible may delete the request as long as the request has notbeen offset by another request. The clearing firm may also modify thequantities of the two positions that are to be made fungible. In someembodiments, if the clearing firm reduces the quantity, the requestretains the time of receipt that is used to determine the priority ofthe request at block 210. However, if the trader increases the quantityof the request, the time of receipt is changed to the time of themodification. In other embodiments, the original request is maintainedwith the original time of receipt, but an additional request is createdwith the time of modification that applies to the additional quantityonly.

In some embodiments, an entity (e.g., an exchange) may establish anaccount at the clearinghouse to facilitate tracking and reporting ofpositions that are made fungible. When the clearing system offsets aportion of the long and short positions of a first request against theshort and long positions, respectively, of a second request, a longposition identical to portion of the long position first request isposted into the account of the entity and a short position identical tothe second request is posted as a short position into the account of theentity. The two positions are matched and cleared, and the match isreported to the entity. The entity can report the match to other tradersand other interested parties without identifying the first and secondclearing firms. Similarly, positions that are identical to portion ofthe short position of the first request that is offset and the longposition of the second request may be posted to the account of theentity for reporting and tracking purposes.

The Exchange or clearinghouse may specify a number of days beforeexpiration by which requests to make positions fungible must bereceived. For example, requests may have to be submitted at least threedays before expiration of a futures contract. In addition, the exchangeor clearinghouse may not allow traders to modify requests within apredetermined number of days before expiration of the futures contract.

In some embodiments, the clearing system may identify and combine, inthe manner described above, positions held by multiple traders to offsetpositions held by one trader, whereby the open long and open shortpositions for each of the products associated with the positions of anyof the traders remain in balance (i.e., are identical). For example,suppose a trader A holds a long position in March, 2007, soybeans and ashort position in March, 2007, soybean oil; a trader B holds a longposition in March, 2007, soybean oil and a short position in September,2007, gold; and a trader C holds a long position in September, 2007,gold and a short position in March, 2007, soybeans. The clearing systemoffsets the long position of trader A against the short position oftrader C (soybeans), the short position of trader A against the longposition of trader B (soybean oil), and the long position of trader Cagainst the short position of trader B (gold). In this manner, anydelivery obligations of traders A, B, and C associated with thepositions held thereby are liquidated and the open long and open shortpositions in March, 2007, soybeans, March, 2007, soybean oil, orSeptember, 2007, gold remain in balance.

It should be apparent that products in which two positions held by atrader are made fungible is not limited to positions acquired throughtransactions managed by an exchange. Some products are traded in an overthe counter (OTC) market where traders negotiate prices, quantities, anddelivery dates. OTC transactions obligate a seller to deliver to a buyerby a specific date a quantity of a product for a particular price.Conversely, the buyer in the transaction has an obligation to acceptdelivery of the product and pay the seller. A trader may report anagreement made thereby in the OTC market to a clearing firm associatedwith the trader, and the clearing firm may report the agreement to theclearing firm. Thereafter, the trader may request, via the clearingfirm, that the clearinghouse make fungible the obligation associatedwith a transaction undertaken in the OTC market and another positionheld by the trader (either from an exchange or an OTC markettransaction). The clearing system settles the positions of the traderspecified in the request against appropriate positions of another traderin a manner identical to that described above.

It should be apparent that although the manner of making positionsfungible describes the use of a system at the clearinghouse, theclearinghouse is an intermediary and that other intermediaries may beused. Furthermore, it should be apparent that the system and methoddescribed above can be used to make liquidate an obligation to deliver,or accept delivery of, any type of product, including financial products(securities or debt instruments), metals, agricultural products, stockindex products, or livestock.

INDUSTRIAL APPLICABILITY

Numerous modifications to the present invention will be apparent tothose skilled in the art in view of the foregoing description.Accordingly, this description is to be construed as illustrative onlyand is presented for the purpose of enabling those skilled in the art tomake and use the invention and to teach the best mode of carrying outsame. The exclusive rights to all modifications which come within thescope of the appended claims are reserved.

1. A method of making positions held by a trader fungible, the methodcomprising the steps of: selecting a first position in a first futurescontract that is deliverable, wherein the first futures contract istraded in a first market; selecting a second position in a secondfutures contract, wherein the second futures contract is traded in asecond market; and offsetting the first position and the second positionthereby eliminating a delivery obligation of the trader.
 2. The methodof claim 1, wherein the first futures contract and the second futurescontract comprise identical underlying products.
 3. The method of claim1, wherein the second futures contract is deliverable.
 4. The method ofclaim 1, wherein the second futures contract is cash settled.
 5. Themethod of claim 1, wherein at least one of the first futures contractand the second futures contract comprises an underlying productassociated with a metal.
 6. The method of claim 1, wherein at least oneof the first futures contract and the second futures contract comprisesan underlying product associated with an agricultural product.
 7. Themethod of claim 1, wherein at least one of the first futures contractand the second futures contract comprises an underlying productassociated with equity, a financial product, or livestock.
 8. The methodof claim 1, wherein the method further comprising the step of receivinginformation transmitted by an exchange.
 9. The method of claim 8,wherein the information transmitted by the exchange is matched tradedata.
 10. The method of claim 1, wherein the first market utilizes anopen outcry auction.
 11. The method of claim 10, wherein the secondmarket utilizes a trading host.
 12. The method of claim 10, wherein thesecond market utilizes an open outcry auction.
 13. The method of claim1, wherein the offsetting step comprises the step of posting a positionidentical to the first position to an account.
 14. The method of claim1, wherein the offsetting step offsets a portion of the first position.15. The method of claim 1, wherein the step of selecting a firstposition comprises the step of selecting the first position from aplurality of positions held by the trader.
 16. The method of claim 1,wherein the first market and the second market are associated with afirst exchange and a second exchange, respectively.
 17. A method ofmaking first long and first short positions held by a first traderfungible, the method comprising the steps of: identifying a firstrequest from the first trader to make the first long position and thefirst short position fungible, wherein the first long position is for adeliverable futures contract; selecting a second request from a secondtrader to make a second long position and a second short positionfungible, wherein the second short position is for the deliverablefutures contract; and offsetting the first long position against thesecond short position and the first short position against the secondlong position, thereby eliminating delivery obligations of the first andsecond traders.
 18. The method of claim 17, wherein the method furthercomprises the step of storing the first request in a database.
 19. Themethod of claim 18, wherein the step of offsetting comprises the step ofidentifying the first request in the database.
 20. The method of claim19, wherein the step of identifying the first request comprises thefurther step of assigning a priority to the first request.
 21. Themethod of claim 20, wherein the step of assigning the priority to thefirst request comprises the still further step of assigning the priorityin accordance with a time when the first request was received.
 22. Themethod of claim 20, wherein the step of offsetting is undertaken inaccordance with the priority.
 23. The method of claim 20, wherein thestep of offsetting utilizes a pro-rata allocation.
 24. The method ofclaim 17, wherein the step of identifying the first request comprisesthe step of modifying the first request.
 25. The method of claim 17,wherein the step of identifying the first request comprises the step ofaccessing a web site.
 26. The method of claim 17, wherein the productsunderlying the first long position and the first short position areidentical.
 27. The method of claim 17, wherein the first short positionis deliverable.
 28. The method of claim 17, wherein the step ofoffsetting comprises the step of offsetting a portion of the first longposition.
 29. The method of claim 17, wherein the step of offsettingcomprises the step of offsetting a portion of the second long position.30. The method of claim 17, wherein the step of identifying a firstrequest comprises the step of selecting the first long position from aplurality of long positions held by the trader.
 31. The method of claim30, wherein the step of selecting the first long position comprises thefurther step of identifying the plurality of long positions and whereinthe step of identifying the plurality of long positions is undertaken bya clearing system.
 32. The method of claim 17, wherein the step ofoffsetting is undertaken by a clearing system.
 33. A method ofliquidating a delivery obligation of a trader, the method comprising thesteps of: identifying a first position acquired in a first market,wherein the delivery obligation is associated with the first position;identifying a second position acquired in a second market; andoffsetting the first position and the second position and therebyeliminating the delivery obligation.
 34. The method of claim 33, whereinunderlying products are associated with the first position and thesecond position and the underlying products are identical.
 35. Themethod of claim 33, wherein the second position has a deliveryobligation associated therewith.
 36. The method of claim 33, wherein thesecond position is cash settled.
 37. The method of claim 33, wherein atleast one of the first position and the second position is associatedwith an underlying product that is a metal.
 38. The method of claim 33,wherein at least one of the first position and the second position isassociated with an underlying product that is an agricultural product.39. The method of claim 33, wherein at least one of the first positionand the second position comprises an underlying product associated withan agricultural product, a metal, equity, a financial product, orlivestock.
 40. The method of claim 33, wherein the method furthercomprises the step of receiving information transmitted by an exchange.41. The method of claim 40, wherein the information transmitted by theexchange is matched trade data.
 42. The method of claim 33, wherein thefirst market is an over the counter market.
 43. The method of claim 33,wherein the first market is associated with an exchange.
 44. The methodof claim 33, wherein the second market is an over the counter market.45. The method of claim 33, wherein the first market is associated witha first exchange and the second market is associated with a secondexchange.
 46. The method of claim 33, wherein the step of offsettingcomprises the step of offsetting a portion of the first position. 47.The method of claim 33, wherein the step of offsetting comprises thestep of selecting a position of a second trader and the further step ofoffsetting the first position against the position of the second trader.48. The method of claim 47, wherein the step of offsetting comprises thestep of selecting a position of a third trader and the further step ofoffsetting the second position against the position of the third trader.